United States Court of Appeals
for the
District of Columbia Circuit
TRANSCRIPT OF
RECORD
Wilson - epe® printing Co. - RE 0003 * Washington 1. D. C.
No. 11,273
QUESTIONS PRESENTED
The questions are whether the petitioner is engaged
in a business or commercial activity within the meaning
of the District of Columbia Revenue Act of 1947, D. C.
Code 1940, Supp. VII, Title 47, Chap. 15; and whether
the receipt of interest on funds invested in the purchase
of notes secured by second deeds of trust on real estate
constitutes doing business within the meaning of the
above act.
INDEX TO BRIEF
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Jurisdictional Statement
Statement of the case....
Questions presented .
Summary of argument....
Argument .
Conclusion ...
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10
Table of Citatiom j
District of Columbia v. Piekford, 86 U. S. App.
D. C. 17. L 6,
District of Columbia v. Warded, 74 App. D. C. 184.]..
Flint v. Stone Tracey Co., 220 U. S. 107, 31 S. Ct. 34j2
McCoach v. Minehill & S. II. R. Co., 228 U. S. 29^3,
33 S. Ct. 419, 57 L. Ed. 842.j.. 4,6
Robb v. District of Columbia, SO U. S. App. D. C. 246 9
Three Forks Coal Co. v. U. S., 9 F. 2d, 946. L 6
Zonne v. Minneapolis Syndicate, 220 U. S. 187, 3tl
S. Ct. 361, 55 L. Ed. 428.1. 6
Statutes Cited
Consolidated Laws of New York, Article 16-A, Chapf-
ter 60 .| 7
D. C. Code, 1940, Supp. VII, Title 47, Chap. 15.j. 4
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G» <0 CD
llnttdi States Gkmrt of Appeals
For the District of Columbia Circuit
No. 11,273
James G. Stone, J ppallet
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V. I
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District of Columbia, A - ppell&c
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PETITION FOR REVIEW OF DECISION OF THE
BOARD OF TAX APPEALS FOR THE I
DISTRICT OF COLUMBIA
APPELLAN T'S BRIEF
JURISDICTIONAL STATEMENT
I
The jurisdiction of this Court is founded on the provi¬
sions of Title 47 Section 2404, District of Columbia Cbde
(1940). This is a petition to review a decision of the
Board of Tax Appeals denying a claim by petitioner for
refund of unincorporated business franchise taxes for
the years 1947 and 194S.
2
STATEMENT OF THE CASE
Petitioner is an individual. Since 1923 he has been a
purchaser of notes secured by second deeds of trust on
real estate. Until 1943 or 1944 he was a partner in a
life insurance agency, but terminated that activity in
the years mentioned. Since such termination he has had
no occupation other than as hereinafter set forth.
During the years 1947 and 194S petitioner purchased
about 35 notes annually and the number of such notes
owned by him in 1947 aggregated about 90 in number
having about $280,000 in face value, while the total
owned in 1948 was about 100 with an approximate face
value of about $300,000. With rare exceptions the notes
were payable in monthly installments. Petitioner never
sold any of the notes hut held them to maturity. In 28
years of note ownership, petitioner has foreclosed twice
under the securing deeds of trust, once in 1925 and once
in 1949.
He received interest of $22,098.63 in 1947, and $23,060.36
in 1948. TTis only other income in 1947 was $619.66 from
insurance commissions, and $128.35 in 1948 from divi¬
dends.
Notes were purchased from various sources—real es¬
tate brokers, builders and individuals. Petitioner did not
purchase from any particular group of agents.
With respect to the purchase of any particular note
offered to him for sale, petitioner’s practice was to in¬
spect the property securing the note and to investigate
the financial stability of the maker or makers thereof.
If satisfied with the maker, the security and the dis¬
count offered, he would consummate the purchase.
With respect to notes owned, petitioner’s practice was:
1. Place notes for safe keeping in bank safe-deposit
vault.
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2. Enter payments in a record kept by him.
3. Make demand for payment upon delinquent makers,
either by phone, or occasionally by letter. j
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Petitioner lived in a nine room house, and he |used
one room for his trust-note activities. This room con¬
tained a telephone, typewriter, desk, bookcase and chairs.
He used his automobile for inspection of properties! and
investigation of makers, driving 9,000 to 12,000 miles! per
year in those connections. j
At times petitioner borrowed from his bank to assist
in note purchases. Tn 1947 and 194S, his bank liabilities
were between $50,000 and $60,000. He paid an interest
rate of 3% for such loans.
Tn 1947 and 1948 petitioner filed unincorporated busi¬
ness franchise tax returns in the belief that his pote
purchasing activity constituted doing business. In his
1948 return, in response to a question on the form, he
answered that he devoted 100 per cent of his time to
this business. I
Petitioner paid $215.92 for 1947 unincorporated busi¬
ness franchise tax and in 1948 a like tax of $143.35.
Thereafter, and within the time allowed by law, he filed
a claim for refund of these taxes. These claims wjere
denied on April 18, 1951, and on July 16, 1951, petitio|ner
appealed to the Board of Tax Appeals upon the ground
that the denial of the claim for refund had been based
upon the erroneous assumption that petitioner was en¬
gaged in a commercial activity subject to the provisions
of the District of Columbia Income and Franchise Tiax
Act of 1947.
The Board of Tax Appeals, by decision dated October
31, 1951, affirmed the action of the assessor and ruled
that during each of the years 1947 and 1948 petitioner
was engaged in an unincorporated business within the
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meaning of Title YHi of the District of Columbia Rev¬
enue Act of 1947, D. C. Code 1940, Supp. YII, Title 47,
Chap. 15.
QUESTIONS PRESENTED
The questions presented by this Petition for Review
of the Decision of the Board of Tax Appeals are:
1. Whether the Petitioner is engaged in a business or
commercial activity within the meaning of the District
of Columbia Revenue Act of 1947, D. C. Code, 1940,
Supp. YII, Title 47, Chap. 15.
2. Whether the receipt of interest on funds invested
in the purchase of notes secured by second deeds of trust
under the circumstance of this case constitutes doing
business within the meaning of the above cited act.
SUMMARY OF ARGUMENT
Petitioner’s activities amount to no more than the
investment of funds in securities, or in obligations se¬
cured by deeds of trust on real estate; that every act
done by petitioner in connection with the purchase and
ownership of such obligations are reasonably part of
the prudent investment of funds and do not constitute
‘‘doing business” within the meaning of the statute in¬
volved. That the statute does not intend to include every
activity within its scope, and that traditionally, the re¬
ceipt of interest or income from invested funds is exempt
from its control.
ARGUMENT
The landmark case in establishing the law of what
constitutes doing business is .1 fcCoach v. Min-el)ill (f- S.
11. 7?. Co.. 22S r. S. 295, 33 S. Ct. 419, 57 L. Ed. S42.
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Tliere the Supreme Court, passing on whether a railway
company which had leased its entire property to an soper-
ating company, and whose entire income came from jrents
received therefrom, plus the receipt of interest andi divi¬
dends from invested funds, and whose activities con¬
sisted largely of the payment of organization and admin¬
istration expenses incidental to the receipt of such mrtnevs
and their distribution among the stockholders, held!such
activities did not constitute doing business undeil the
Federal corporation tax law of August 5, 1909, imposing
an excise tax upon the doing or engaging in business in
a corporate capacity. In distinguishing the case of
Flint v. Slone Tracey Co., 220 F. S. 107, 31 S. Ct. s 342,
the court stated: j
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“In short, the inclusion of income derived from prop¬
erty in arriving at the measure of the tax t(j> be
imposed with respect to the doing of corporate busi¬
ness was sustained largely because the property not
used in the business, and the income from iucli
property, have a fair relation to the business itself,
and may contribute materially to its proper and
economical conduct. But that reasoning furnishes
no support for the contention that mere receipt of
income from property, and the payment of organjiza-
tion and administration expenses incidental to jthe
receipt and distribution thereof, constitutes such a
business as is taxable within the meaning of the Act
of 1908. The distinction is between (a) the receipt
of income from outside property or investments! by
a company that is otherwise engaged in business;
in which event the investment income may be addled
to the business income in order to arrive at jtlie
measure of the tax; and (b) the receipt of income
from, property or investments by a company that is
not engaged in business except the business of open¬
ing property, maintaining the investments, collecting
the income, and dividing it between its stockholders.
In the former case the tax is payable; in the lattjer,
not.” I
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We submit that every act performed by the petitioner
in the case at bar comes squarely within the language
italicized above.
Everything he does is done for the purpose of either
“ owning” the notes, that is acquiring their ownership
by purchase, “maintaining” them—by investigation and
supervision—and “collecting the income”.
Of similar import is the leading case of Zomme v. Min¬
neapolis Syndicate, 220 l T . S. 187, 31 S. Ct. 361, 55 L.
Ed. 428.
If instead of purchasing notes made by individuals and
secured by their real estate, would petitioner be consid¬
ered as being engaged in a business activity if he pur¬
chased obligations of a corporation, even though it was
necessary to borrow money for the purpose? We sub¬
mit he would not and that his position is no different
than the average investor who devotes his time to the
analysis of stock market reports and purchasing stocks
or bonds for investment only.
See Three Forks Coal Co. v. U. S., 9 F. 2d 946,
where the Court ruled that a corporation whose
sole transactions during the tax period consisted of buy¬
ing stock in another corporation and borrowing money to
pay therefor and to pay its taxes was not “doing busi¬
ness”.
The receipt of income from interest or dividends on
invested capital is akin to the receipt of rent from prop¬
erty owned, and as traditionally defined, neither consti¬
tute doing business. McCoaeh v. Min chill etc., supra.
This Court recently adhered to a like ruling in District
of Columbia v. Pick ford, 86 IT. S. App. D. C. 17. There
the Court rejected the contention made in this case as
in that by the District of Columbia that all forms of
commercial activity are to be embraced in the taxing
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statute. There it was held that the ownership of prop-
erty and the collection and distribution of income re¬
ceived therefrom is not the conduct of business within
the meaning of the statute, and there being no “ busi¬
ness” there was no tax.
The District of Columbia statute is analogous to the
New York unincorporated business taxing law, and was
probably borrowed from it. The New- York Act, Article
1G-A, Chapter 60, Consolidated Laws of New York, pro¬
vides :
SEC. 386: The words “unincorporated business”
mean any trade, business or occupation conducted
or engaged in by an individual, statutory or com¬
mon law trust, estate, partnership or limited or $pe-
cial partnership, society, association, executor, iad¬
ministrator, receiver, trustee, liquidator, referee, as¬
signee, or by any other entity of fiduciary other tjian
a trade or business conducted or engaged in by ^nv
corporation, or by any other entity subject to the
tax imposed by articles 9, 9a, 9b, 9c of this chapter
and include any trade or business which if conducted
or engaged in by a corporation would be taxable
under any of said articles; but exclude the practice
of law, medicine, dentistry, architecture which unjler
the existing law cannot be conducted under corporate
structure, and any other case in which more than
eighty per centum of the gross income is derived
from the personal services actually rendered by the
individual or members of the partnership or other
entity in the practice of any other profession and in
which capital is not a material income-producing
factor.
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The regulations to this Act are also similar to thcj>se
promulgated by the District of Columbia. The regulation
defining a trade or business is quoted herewith.
ARTICLE 4— “In the great majority of cases there
will be no question to whether or not an entity! is
conducting or engaged in a trade, business or occju-
s
pation, which would constitute the carrying on of an
Unincorporated Business. The terms of the statute
are extremely broad and include all kinds of busi¬
nesses, trades and occupations, except as are ex¬
plicitly excluded. Obviously, it would not be feasible
to attempt to enumerate the various trades, occupa¬
tions, and businesses in which individuals, partner¬
ships, associations and other unincorporated entities
engage. There would be comprehended all phases
of merchandising from the manufacturer down
through the wholesaler and jobber to the retailer.
There would also be included those businesses which
sell service as distinguished from those which sell
commodities, such as the laundry, barber shop,
beauty parlor, service station, etc. Also included
would be the private banker, brokerage house, pro¬
duce broker, the real estate broker, insurance broker,
and a host of others. Occasionally a borderline case
will present itself. When this occurs, consideration
must be given to all of the facts and circumstances
involved. Often the continuity, frequency and regu¬
larity of activities as distinguished from the trans¬
actions of an isolated or incidental nature, will be
the factors which will determine whether or not the
activitv constitutes the carrving on of an Unincor-
porated Business. Consideration must also be given
to the amount of time, energy' or thought devoted to
the pursuit of a vocation or occupation.”
Included in the regulations are a set of official ques¬
tions and answers to the regulations. The following are
the questions pertaining to interest and dividends derived
from investments:
Question 15: Is one possessed of capital carrying
on an unincorporated business if his activities are
limited strictly to the investing and re-investing of
his funds in securities and collecting his income
therefrom?
ANSWER: NO.
Question 16: Would the amount of the capital in¬
volved make any difference in the answer to ques¬
tion 15?
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ANSWER: NO. |
Question 17: Would the answer to question lp be
different if, in addition to investing and reinvesting
funds derived from maturing obligations, the party
also changed his investment policy from time to jtime
and sold some securities and purchased others, there
being an absence of speculative intent? |
ANSWER: NO.
Question 18: Would the answer to question 15 be
different if the party in addition to investing sand
reinvesting his funds, with or without a change in
investment policy bought and sold securities for 1 the
purpose of making profits or establishing looses
thereby? j
ANSWER: Possibly. The facts in such cases must
be weighed and each case decided on its own merits.
Continuity, frequency, and regularity would havi to
be considered as well as the amount of energy, time
and thought involved.” j
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We submit that the Board of Tax Appeals erred! in
ruling that this case is controlled by Robb v. District of
Columbia, 80 Y. S. App. D. C. 24G. The material differ¬
ence is that in the Robb case the taxpayer bought <pnd
sold for a profit notes of the kind involved in this case;
and, that this activity was part of a general real estate
and brokerage business conducted by it. Other catees
cited by and relied upon by the Board are likewise in¬
applicable. District of Columbia v. Wardell , 74 App.
D. C. 184 was decided under a different statute than hfre
involved, and its holding has since been at least limited
by District of Columbia v. Pickfo'itd, supra.
Cases holding that writing insurance or operating! a
hospital are manifestly not in point.
The Board of Tax Appeals implies in its memorandum
that the activities of the petitioner were broader in
scope than in the PicJcford case, supra. It may be that
petitioner was more active, but without exception all jof
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pation, which would constitute the carrying on of an
Unincorporated Business. The terms of the statute
are extremely broad and include all kinds of busi¬
nesses, trades and occupations, except as are ex¬
plicitly excluded. Obviously, it would not be feasible
to attempt to enumerate the various trades, occupa¬
tions, and businesses in which individuals, partner¬
ships, associations and other unincorporated entities
engage. There would be comprehended all phases
of merchandising from the manufacturer down
through the wholesaler and jobber to the retailer.
There would also be included those businesses which
sell service as distinguished from those which sell
commodities, such as the laundry, barber shop,
beauty parlor, service station, etc. Also included
would be the private banker, brokerage house, pro¬
duce broker, the real estate broker, insurance broker,
and a host of others. Occasionally a borderline case
will present itself. When this occurs, consideration
must be given to all of the facts and circumstances
involved. Often the continuity, frequency and regu¬
larity of activities as distinguished from the trans¬
actions of an isolated or incidental nature, will be
the factors which will determine whether or not the
activity constitutes the carrying on of an Unincor¬
porated Business. Consideration must also be given
to the amount of time, energy or thought devoted to
the pursuit of a vocation or occupation.”
Included in the regulations are a set of official ques¬
tions and answers to the regulations. The following are
the questions pertaining to interest and dividends derived
from investments:
Question 15: Is one possessed of capital carrying
on an unincorporated business if his activities are
limited strictly to the investing and re-investing of
his funds in securities and collecting his income
therefrom?
ANSWER: NO.
Question 16: Would the amount of the capital in¬
volved make any difference in the answer to ques¬
tion 15?
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ANSWER: NO.
Question 17: Would the answer to question 15 be
different if, in addition to investing and reinvesting
funds derived from maturing obligations, the party
also changed his investment policy from time to time
and sold some securities and purchased others, there
being an absence of speculative intent ? I
ANSWER: NO.
Question IS: Would the answer to question 15 be
different if the party in addition to investing land
reinvesting his funds, with or without a change in
investment policy bought and sold securities for the
purpose of making profits or establishing losses
thereby? j
ANSWER: Possibly. The facts in such cases njiust
be weighed and each case decided on its own merits.
Continuity, frequency, and regularity would have to
be considered as well as the amount of energy, tjime
and thought involved.”
We submit that the Board of Tax Appeals erred in
ruling that this case is controlled by Robb v. District j of
Columbia, SO Y. S. App. D. C. 246. The material differ¬
ence is that in the Robb case the taxpayer bought <j ind
sold for a profit notes of the kind involved in this case;
and, that this activity was part of a general real estate
and brokerage business conducted bv it. Other cases
cited by and relied upon by the Board are likewise [in¬
applicable. District of Columbia v. War dell, 74 App.
D. C. 184 was decided under a different statute than here
involved, and its holding has since been at least limited
by District of Columbia v. Pickfo'r'd, supra.
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Cases holding that writing insurance or operating) a
hospital are manifestly not in point.
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The Board of Tax Appeals implies in its memorandum
that the activities of the petitioner were broader 1 in
scope than in the Rich ford case, supra. It may be tliat
petitioner was more active, but without exception all of
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his activities were directed to one end—to the ‘ ‘owning,
maintaining and collecting ’* of investments.
CONCLUSION
It is respectfully submitted that the Board of Tax
Appeals erred in declaring the petitioner to be engaged
in a trade or business within the terms of the act, and
in denying his application for refund of taxes paid on
the erroneous belief that he was so engaged.
Rudolph A. Ashton
Solomon Grossberg
Irving B. Yochelson
Isadore Brill
Attorneys for Petitioner
APPENDIX
INDEX
PAGE
Petition. 2 A
Findings of Fact and Conclusions of Law. 4 A
Memorandum . 7 A
Decision . 10 A
Transcript of Proceedings. 10 A
James G. Stone. 10 A
Direct Examination . 10 A
Cross Examination . 10 A
Resps. Ex. H for identification. 18 A
Resp. Ex. A . 20 A
Resp. Ex. B . 22 A
Affidavit of Taxpayer. 24 A
Itttipb States (Enurt of Appeals i
For the District of Columbia Circuit
No. 11,273
James G. Stone, Petitioner,
v.
District of Columbia, Respondent.
Petition for Review of Decision of the
Board of Tax Appeals for the District of Cohimpia
JOINT APPENDIX
1
2 A
Filed Jul 16 1951
BOARD OF TAX APPEALS
FOR THE DISTRICT OF COLUMBIA
James G. Stone, Petitioner
vs.
District of Columbia, Respondent
Docket No. 1266
Petition■
The above named petitioner appeals from a denial of
claim for refund of taxes against him and avers as fol¬
lows :
1. The petitioner is an individual with residence at
4211 43rd Street, N. W., Washington, D. C.
2. The tax in controversy is an unincorporated busi¬
ness franchise tax for the years 1947 and 1948, and unin¬
corporated business licenses for the years 1949 and 1950.
3. The taxes were paid as follows under the erroneous
assumption that petitioner w T as liable for same as he had
been advised by the District of Columbia he was subject
to the unincorporated business tax:
1947 unincorporated business tax—$215.92 paid on
4/15/48
1948 unincorporated business tax—$143.35 paid on
4/15/49
The license fees were paid as follows:
1949 unincorporated business license—$10.00 paid 12/48
1950 unincorporated business license—$10.00 paid 12/49
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4. The denial of claim for refund is based updn the
erroneous assumption that petitioner 4 ‘is engaged in a
commercial activity” subject to the provisions of the
District of Columbia Income and Franchise Tax ^ct of
1947. Claim was made for refund and said refun^ was
denied by the District of Columbia under registered let¬
ter of the assessor dated April 18, 1951.
5. The facts upon w T hich petitioner relies as the basis
of this proceeding are as follows:
2 (a) Petitioner was a life insurance salesman of
the Atlantic Agency Inc. from 1922 to 1946. | Dur¬
ing 1946 petitioner was afflicted with asthma and was
unable to talk or properly perform his duties. He there¬
upon retired from active business and has remained re¬
tired to this date.
(b) Petitioner has invested his life earnings in second
trust real estate notes. His sole activity with respect
to these notes has been collection and regular payments
made by the makers of these notes and the reinvesting of
portions of the proceeds in additional second trust dotes.
(c) Petitioner has never sold a second trust notp but
has held all but two notes to maturity. These two potes
were foreclosed upon because of delinquency. Petitioner
w^as forced to purchase back the property of one toj pro¬
tect his interest. The other was paid for by an inde¬
pendent purchaser of the property.
Petitioner avers that the above activities are purely
investment and do not constitute “the carrying on and
engaging in any trade or business” within the meaning
of the District of Columbia Income and Franchise Tax
Act of 1947, Article 1, Title 8, (DC Code 1940, Supp. 7,
Section 47-1574).
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6. Whereupon, the petitioner prays that this I^oard
may hear the proceedings, and prays that the taxes and
license fees of $379.27 as above listed be refunded.
4 A
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Filed Oct 31, 1951
3 Findings of Fact and Conclusions of Law
Findings of Fact
1. In 1923 petitioner began buying notes secured by
second deeds trust on real estate, and has been doing
so ever since. When he began, he was a partner in a
life insurance agency, but that activity was terminated
in 1943 or 1944. Throughout 1947 and 1948 petitioner
had no occupation other than as hereinafter set forth.
2. During 1947 and 1948, and prior thereto, petitioner
would be called by real estate agents or by title com¬
panies, who inquired whether he wanted to buy a note
secured bv second deed of trust. If he had funds avail-
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able, he looked at the property to see the value that was
there, and the amount secured by first trust, and would
investigate the purchaser of the property, who was the
maker of the note. If petitioner decided the note was a
good risk he would agree to take it, after agreement on
the price had been reached. He bought the notes on a
discount basis.
3. It was known to the real estate people and the
title companies that petitioner was a prospective buyer
of second-trust notes. In order for a real estate agent
to sell a house it was sometimes necessary that it be
financed to the satisfaction of the purchaser, and peti¬
tioner frequently got calls from different companies in¬
quiring as to whether he would buy a particular note.
Petitioner did not do business with any particular group
of agents. He had two sons working for a title
4 company and they told various agents that he was
interested in the purchase of notes.
4. Petitioner did not sell any of the notes, but held
them to maturity. Petitioner has foreclosed undfer his
deeds of trust only twice in 28 years, once in 1925 and
once in 1949.
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5. In 1947 he owned approximately 90 notes, (j>f the
face value of approximately $2S0,000. In 1948 he pwned
approximately 100 notes, of the face value of approxi¬
mately $300,000. He bought about 35 notes in eajeh of
these years. With rare exceptions, the notes were pay¬
able in monthly installments. He received $22,098.63 in¬
terest in 1947, and $25,060.36 in 1948. His only 'addi¬
tional income was $619.66 from insurance commissions in
1947, and $128.35 from dividends in 1948. i
6. Petitioner kept the notes in his bank safe-de|posit
vault, and collected the payments thereon himself; In
cases of delinquency, he communicated with the makers
by telephone or, infrequently, by correspondence. Every
day either he or his wife entered interest paid in a book
he kept for that purpose. j
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7. Petitioner lived in a nine room house. He Used
one room for his trust-note activities. It contained a
telephone, typewriter, a desk, a bookcase and chairsi.
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8. He had an automobile which he drove a totak of
about 15,000 miles per year, and he used it in connection
with his inspections of various properties and for in¬
vestigating the various note makers about 60% or 75%
of the time.
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9. Sometimes where he did not have sufficient cast! to
purchase particular notes, he borrowed money from the
bank for that purpose, and paid the bank interest at the
rate of about 3 per cent. His bank liabilities during
1947 and 194S were between $50,000 and $60,000.
10. Petitioner filed unincorporated business franchise-
tax returns for the years 1947 and 1948. In his 1<|)48
return, in response to a question on the form which
called for the percentage of time devoted to this busi¬
ness, he answered “100”.
5 11. Petitioner paid $215.92 for 1947 unincor¬
porated business franchise tax, one-half thereof on
May 5, 194S and one-half thereof on November 15, 1948.
He paid $143.35 for 194S unincorporated business fran¬
chise tax, one-half thereof on April 28, 1949 and one-half
thereof on November 17, 1949. Thereafter, and within
the time allowed by law, he filed claim for refund of
these taxes. The claims were denied on April 18, 1951.
On July 16, 1951 petitioner appealed to this Board upon
the ground that the denial of the claim for refund had
been based upon the erroneous assumption that petitioner
was engaged in a commercial activity subject to the pro¬
visions of the District of Columbia Income and Fran¬
chise Tax Act of 1947.
.Conclusions of Law
1. During each of the years 1947 and 1948 petitioner
was engaged in an unincorporated business within the
meaning of Title VIII of the District of Columbia Rev¬
enue Act of 1947, D. C. Code 1940, Supp. VII, Title 47,
Chap. 15, Title VIII.
2. Petitioner’s claim for refund of 1947 and 1948
unincorporated business franchise taxes was properly
denied.
Decision will be entered for respondent.
/s/ Lawrence Koenigsberger,
Lawrence Koenigsberger,
Member Sole,
Board of Tax Appeals for
the District of Columbia
6
Filed Oct 31 1951
Memorandum !
The question on this appeal is whether the activities
of petitioner as set forth in the findings of fact, ambunt
to a trade or business within the meaning of the appli¬
cable portions of the District of Columbia Revenue Act
of 1947 (61 Stat. 331, D. C. Code 1940, Supp. jvil,
Tit. 47, Art. I). j
D. C. Code 1940, Supp. VTI, Sec. 47-1574b imposes
a tax upon every unincorporated business, for the privi¬
lege of carrying on or engaging in any trade or business
within the District, and of receiving income from soujrces
within the District.
Sec. 47-1551c(h), which is section 4(h) of the Act of
1947, defines the words “trade or business” as including
the engaging in or carrying on of any trade, business,
profession or calling or commercial activity in the dis¬
trict. |
As will be seen from the foregoing, the definition of
“trade or business” is apparently to be very broad. |
The definition contained in Sec. 47-1551c(h), is ithe
same as the definitions of the same terms contained! in
section 43(12), Title IT of the Revenue Act of 1939, D. C.
Code 1940, sec. 47-1543(12). In Robb v. District of ^Co¬
lumbia, 80 IT. S. App. D. C. 246, 152 F. 2d. 283, thLre
was involved the question of whether certain transactions
had resulted in capital gains, or had been derived
7 from the sale of property held by the taxpayer
for sale to customers in the ordinary course of
its trade or business. The corporation in that case \yas
engaged, as is petitioner, in the purchase of notes Se¬
cured by deeds of trust on real estate, some of which it
sold at a profit and others of which it held to maturity.
The Court of Appeals held that the gains had been de-
rived from property held by the taxpayer for sale in the
ordinary course of its trade or business. It was neces¬
sarily implicit in the decision that its trust-note activities
were a trade or business.
The activities of petitioner, even if not “ trade or
business” in the ordinary meaning of these words, did
constitute “commercial activity” which is a part of the
statutory definition of the words “trade or business.”
Commercial activity means activity relating to commerce
and “commerce” means more than buying and selling
merchandise.
In District of Columbia v. Wardell, 74 App. D. C. 184,
122 F. 2d. 202, The Court of Appeals held that the re¬
ceipt of rents from the operation of apartment houses
and an office building was a business or commercial ac¬
tivity within the meaning of the District of Columbia
Revenue Act of 1937 (50 Stat. 688, Tit. VI, sec. 1; 52
Stat. 363, Sec. 6; D. C. Code 1929, Supp. IV. Tit. 20, sec.
970), which imposed a tax on persons engaged in busi¬
ness defined by the statute to include “any trade, busi¬
ness, profession, vocation, or commercial activity.”
The Supreme Court has held that the. writing of in¬
surance is commerce within the meaning of the Federal
anti-trust law (United States v. South-Eastern Under¬
writers Association, 322 U. S. 533, 545); that the fur¬
nishing by a co-operative organization of medical and
hospital service to its members is commerce within the
meaning of the anti-trust laws (American Medical Asso¬
ciation v. United States, 317 U. S. 519, 528); and that
the operation of a hospital is a commercial purpose
within the meaning of the term as used in a treaty
(Jordan v. Tashiro, 278 U. S. 123, 127). In the last-
named case the Court said:
8 “While in a narrow and restricted sense the
terms ‘commerce’ or ‘commercial’, and ‘trade’ may
be limited to the purchase and sale or exchange of goods
and commodities, they may connote, as well, other occu¬
pations and other recognized forms of business enter¬
prise which do not necessarily involve trading in pier-
chandise.” i
The language of D. C. Code 1940, Supp. VII, 1 sec.
1551c(h) indicates that Congress had in mind the broader,
rather than the restricted meaning of the term “trade or
business.” |
In Flint v. Stone Tracey Co., 220 U. S. 107, 171, the
Supreme Court defined “business” as “that which occu¬
pies the time, attention, and labor of men for the pur¬
pose of a livelihood or profit.” The Supreme Court has
never receded from that definition, although it has ^ield
in certain cases e.g. Zonne v. Minneapolis Syndicate, 1 220
U. S. 187; McCoach v. MinehUl & S. H. R. R. Co., 228
U. S. 295, that it was not applicable to certain situations
there presented. In District of Columbia v. PicJcford\ 86
U. S. App. D. C. 179, F. 2d. 271, the ownership of a
hotel which was being operated by a lessee where ithe
owner was engaged in no activities in regard thereto
except receiving the rent, was held not to be trade! or
business within the meaning of the statute here under
consideration. The foregoing statement of the activities
of the taxpayer in the Pickford case compared with the
activities of the petitioner in this case indicates tiiat
there is a very wide divergence between them.
It seems to the Board that the petitioner was engaged
in business within the meaning of the statute, and fhe
assessment will be affirmed.
10 A
9 Filed Oct 31 1951
Decision
This proceeding came on to be heard upon the peti¬
tion filed herein; and upon consideration thereof and of
the evidence adduced at the hearing on said petition, it is,
by the Board, this 31st day of October, 1951,
ADJUDGED and DETERMINED, That the action of
the Assessor in denying the claim of petitioner, James
G. Stone, for refund of unincorporated business fran¬
chise taxes for 1947 and 194S, herein appealed from, be,
and it is, hereby affirmed.
* • * *
Transcript of Proceedings
16 James G. Stone
was called as a witness by counsel for the Petitioner and,
having been first duly sworn, was examined and testified
as follows:
Direct Examination
• • • •
26 Cross Examination
BY MR. UPDEGRAFF:
* • • •
34 Q I am trying to find out from Mr. Stone if
he knows the total, the principal amount of those
eighty notes that you held in 1944.
MR. ASHTON: I object. I can see no—how that
will affect this case, which has to deal only with 1947
and 1948. How can the principal amount of the notes
affect this case in any way, shape, or form ?
11 A
MB. UPDEGRAFF: If Your Honor please, I objected
to the introduction of this evidence prior to 1947 and
was overruled. I submit I have a right to go into! it to
show the continuity and trend of the business activities
of the Petitioner over a period of years.
MR. ASHTON: We were showing volume from the
standpoint of numbers, Your Honor, not as to amount.
It would only be an estimate on the part of the witness.
Counsel for the Respondent has figures in front of him
which he is trying to make the witness make an approxi¬
mation on, and it might be prejudicial to him.
THE BOARD: Mr. Ashton, when you opened the door,
I don’t think you should object to opposing coun-
35 sel going through it. Answer the question it you
can.
* * # #
I
A Well, right now I am not prepared to exactly an¬
swer that, only as a guess. In 1944, I guess it has been
about seven years, at that time there were approximately
around 175,000, face amount of the notes.
j
• • * •
I
42 BY MR. UPDEGRAFF:
* * • *
Q In Respondent’s Exhibits A and B, which! are
43 your 1947 and 1948 Unincorporated Business Fran¬
chise returns, you have claimed several deduc¬
tions. • # • A That is right. j
• # * #
Q In Respondent’s Exhibits A and B, you have
claimed depreciation on part of a building. What bujild-
ing was that? A That was at my residence.
Q And was that the large room you called your
A Yes.
Q —in which you did these various things? A Tfiat
is right.
12 A
Q In Schedule L of Respondent’s Exhibits A and B,
you have claimed certain other deductions. One of them
is telephone expense. What is that?
• • • •
44 THE BOARD: I do not understand that Mr.
Updegraff is challenging the correctness of the
figures.
MR. UPDEGRAFF: I am not.
MR. ASHTON: Oh, I see.
THE BOARD: If I can judge what he is trying to
show, he is trying to show the presence of business ex¬
penses showing the presence of a business.
^IR. UPDEGRAFF: Exactly what I am trying to do.
MR. ASHTON: I will concede that, then.
BY MR. UPDEGRAFF:
Q Mr. Stone, you have claimed a deduction each year
in Respondent’s Exhibits A and B of $60 for telephone.
Those respective amounts each year were the amounts
expended by you, were they not, in connection with your
investment business? A Well, that was part of my tele¬
phone bill, and I attributed $60 to my investment busi¬
ness.
Q On the same theory that you attributed one ninth
of the depreciation of the building, being a nine-room
house, to your business? A That is right.
Q You have also bank charges as a deduction for
business expense each year, in the amount of $60.
45 What were those charges? Do you have the rec¬
ords to show them? A That was a service charge.
Q Do you have those records with you to show what
those charges were? A Well, let’s see.
THE BOARD: Isn’t it a fact, Mr. Stone, that the
bank made a flat charge of 25 cents or 50 cents for each
collection on a note?
THE WITNESS: No. This was a service charge due
to the activity of my account, together with the amount
13 A
I
of funds that I kept in there, in the bank. In other
words, if my funds were—
THE BOARD: You don’t need to put it in lother
words. i
THE WITNESS: Excuse me.
THE BOARD: Weren’t these charges were made for
collections on your notes?
THE WITNESS: No. |
THE BOARD: You collect those notes yourself?
THE WITNESS: I collected the notes myself in those
years. I
* * • *
51 BY MR. UPDEGRAFF: j
Q In the subpoena served upon you, Mr. Sijone,
you were called upon to produce one copy each of' ten
different letters written and sent by you, together with
any correspondence received in connection therewith dur¬
ing the calendar years 1947 and 1948, concerning ^our
business activities. Do you have such letters and papers?
A Well, now, let’s see whether I have it here.
52 (After inspecting documents) Well, I never kept
any files, and I never was interested in keeping
any correspondence after I had been satisfied as to the
payments being made. The only thing I have her^ is
for 1950 and 1951. I have nothing before then, and a
very few during these years, of correspondence.
Q You mean you destroyed the records of 1947 and
1948? A Well, I never had any records, because—-
THE BOARD: You kept carbon copies of letters tjiat
you sent ? ;
THE WITNESS: Yes; here is a carbon copy right
here of a few that I sent; but as a matter of fact; I
think this is all I have. j
THE BOARD: What became of those carbon copies?
THE WITNESS: Well, Your Honor, the carbon
copies were like this: The only carbon copies I havej I
write a person a letter and remind him of the payments
14 A
being in arrears. After I became satisfied, well, after a
reasonable number of months, I just threw the things
away. I didn’t realize there was an importance to keep¬
ing it.
THE BOARD: Yon forgot that the Government is a
partner in all your enterprises.
THE WITNESS: Your Honor, I realize that now,
but at the time I didn’t realize it. I didn’t even think it
meant anvthing.
63 BY MR. UPDEGRAFF:
Q Did you use one of those automobiles in con¬
nection with your inspection of the various properties on
which you bought notes? A I did.
Q And for investigating the various purchasers
64 and so forth? A I did.
Q You used it solely for those purposes? A
No. No.
Q What percentage of the time was the automobile
used for your investment business activities? A Well,
I do quite a bit of driving around the country, around
town and also around the country, and I’d just approxi¬
mate it, so much for this business activity.
Q How much did you approximate? A Whatever
the amount is on that thing there. I forget right now.
Q Can’t you tell us the percentage? Was it 70, 80,
or 90 per cent? A The percentage?
Q Yes. A I would say it was around 60 per cent,
probably, 75, maybe.
# • * •
65 BY MR. UPDEGRAFF:
Q When you say your notes, you mean these
various notes you bought in your investment business?
A That is right. That is right. I put them all in my
safe deposit box.
Q How often did you go to that safe deposit box dur¬
ing 1947 and 1948? A I can’t tell right offhand.
Q Was it every day? A Oh, no, not every day.
Q Was it every other day? A Oh, no. No. I w^uld
go in for one reason or another, approximately thre0 or
four times a month.
Q Three or four times a month, did you say? A
Yes, a month; maybe more.
Q There was a consistent pattern of visit^ to
66 the bank? A I wouldn’t say exactly consistent.
For instance, to throw more light on this: Iff,—
when a person paid me, paid a note off, naturally it jwas
up to me to go in my deposit box and get the note out.
When I would—I changed my will once or twice. Mfell,
T keep it in my safe deposit box, put it in and take it but.
There is nothing exactly consistent, but I would just guess
it was three or four or five times a month.
Q You went to that safe deposit box whenever Vou
wanted to remove a note or place therein a note? ' A
"Right. |
Q Tn connection with your investment business, is tfhat
true? A Right. j
Q That could be once a week or twice a month or
however it may be: also visits with respect to your will
and so on? A Like that, yes.
* • * *
72 BY MR. ITPDEGRAFF: j
Q Tn your returns for 1947 and 1948, Respond¬
ent's Exhibits A and B, you have claimed under item 15
on the first page in each case, as a deduction, the amofint
of $260 in salaries and wrages not deducted elsewhefe,
and excluding compensation described under item 14,
which is salaries and wrages. Who received that mon^v,
or for what services? A Wages?
Q Yes. A That was a proportionate part for our
maid. j
73 Q For what? A A proportionate amount of
cleaning, and so forth, my den, for our maid serfv-
16 A
Q I see. That was only your maid, nobody else?
A Nobody else.
THE BOARD: Did you have any clerical help?
THE WITNESS: No, I don’t have any clerical help.
BY MR. UPDEGRAFF:
Q Who actually typed your letters? A I typed my
letters as a rule. Occasionally, Mrs. Stone would type a
letter.
* * * *
75 BY MR. UPDEGRAFF:
Q During 1947 and 194S, did you borrow from
any bank or any person or any institution, any funds for
your own personal use or the personal use of your wife,
on which you had to pay interest? A I did not, not for
personal use.
THE BOARD: It was all in connection with this
second trust business?
THE WITNESS: Right.
BY MR. UPDEGRAFF:
Q Mr. Stone, I hand you what purports to be your
individual income tax returns for the years 1944 to 1948,
inclusive, and ask vou if those are vour returns for those
• *
years, filed with the District of Columbia govern-
76 ment? A That is my return, sir.
* * * #
A (Continuing) They are all my returns, sir.
MR. UPDEGRAFF: I offer them in evidence as Re¬
spondent’s Exhibit F, G, H, I, and J.
MR. ASHTON: I object, Your Honor. It is not rele-
tive to the case on hand, 1944 through 1948.
THE BOARD: Why are they relevant?
MR. UPDEGRAFF: Because, Your Honor, they tie in
with the Unincorporated Business Tax returns of this
Petitioner with respect to 1947 and 1948; and with re¬
spect to the years 1944 to 1946, it clearly shows these
deductions in the operation of a business by this Peti-
17 A
tioner. Since evidence was offered and admitted on be¬
half of the Petitioner with respect to years prior to 1947,
I submit we have a right to meet, to counteract that evi¬
dence. !
MR. ASHTON: Your Honor, the Petitioner concedes
the fact that he took off on his 1947 and 1948 Unincor¬
porated Business Tax returns certain items of expanses
and deductions. We concede that. We do not—
THE BOARD: You don’t have to concede it,
77 because the returns show it.
MR. ASHTON: That is right, the returns Show
it. Therefore, I can see no purpose in bringing in the
individual tax returns of 1944 through 1948. It sejrves
no purpose. j
THE BOARD: I am going to exclude the returns
from 1944 through 1946 and admit the returns of 1947
and 1948.
• • • *
MR UPDEGRAFF: T am making a proffer of proof.
THE BOARD: Wait a minute. To make a proffer
of proof, just let the returns be marked, and they jwill
become a part of the record.
MR. UPDEGRAFF: Marked for identification?
THE BOARD: They have been marked, I think.
MR. UPDEGRAFF: Not yet. I offered them all in
evidence.
THE BOARD: They will all be marked for identifica¬
tion, and the last two will be received in evidence. The
others will stand as a proffer. i
• * * *
I
i
i
i
i
i
i
i
i
18 A
Resps. Ex. H for identification
• • • ,•
FORM D-40
DISTRICT OF COLUMBIA
INDIVIDUAL INCOME TAX RETURN
FOR CALENDAR YEAR 1946
or fiscal year begun ., 19., and ended., 19.
To be filed with the Assessor, D. C. not later than the
loth day of the fourth month following the close of your
taxable year
Name. James G. Stone .....
Type or Print
Address. 1924 Park Road, .Zone No. 10 ..
(Street and number, or rural route)
Give address shown on previous
return if different from that above.
Did you file a return with the District of Columbia for
the year 1945?. Yes. ..
If not state reason.
ITas the Bureau of Internal Revenue made any adjust¬
ments in the Federal returns filed by you for the years
1943? 1944? 1945?. JVo .
If so, attach a detailed statement explaining such adjust¬
ments unless previously submitted to the Assessor, D. C.
• • • •
Schedule CC.—Profit (or Loss) from Business or
Profession. (See Instruction 6)
(State business name and address if different from name
and address on page 1). Real Estate Loans .
1. Total receipts (state nature of business or
profession)
$18031 27
I
I
I
I
I
I
I
19 A j
i
COST OF GOODS SOLD j
j
2. Inventory at beginning of year. $ j
3. Merchandise bought for sale .
4. Labor .
5. Material and supplies . |
6. Other costs (itemize below) ...
7. Total (lines 2 to 6) .
8. Less inventory at end of year .
9. Net cost of goods sold (line 7 minus line 8)
10. Gross profit (line 1 minus 9) .
Enter “C,” or “C or M,” on lines 2 and S to indicate
whether inventories are valued at cost, or cost or market,
whichever is lower. j
OTHER BUSINESS DEDUCTIONS
I
10. Salaries not included as “Labor” (do not
deduct compensation for yourself) . 260 00
11. Interest on business indebtedness . 1306 14
12. Taxes on business and business property .. 131 73
13. Losses (explain below) .
14. Bad debts arising from sales or services
(from schedule AA) .
15. Depreciation, obsolescence, and depletion \
(explain in Schedule DD) . 84 00
16. Rent, repairs, and other expenses (itemize
below or on separate sheet). 87^ 50
17. Total (lines 10 to 16). $ 2661j 37
18. Total deductions (line 9 plus line 17). $ 266li 37
19. Net profit (or loss) (line 1 minus line 18) j
(enter as item 6, page 1). $15369 90
Line 6 (itemize) .1
Line 13 (itemize) .j
Line 16 (itemize) Tel. $60.00, Bank Charges $60.00 Stal &
Prtg. $150.00 Acctg. $25.00, 1/9 Heat $19.50, Auto Repaiirs
& Gasoline used in business $565.00. Total $879.50.
# • * #
20 A
Verification of Return (See Instruction F)
I declare under the penalties of perjury that this re¬
turn (including any accompanying schedules and state¬
ments) has been examined by me, and to the best of my
knowledge and belief is a true, correct, and complete re¬
turn.
(Signature of person (other than taxpayer or agent)
preparing return)
James G. Stone
(Date) (Signature of taxpayer) (Date)
(Name of firm or employer, if any)
(If this is a joint return of husband and wife, it
must be signed by both)
Resp. Ex. A
# * * *
FORM D-30
DISTRICT OF COLUMBIA
UNINCORPORATED BUSINESS FRANCHISE
TAX RETURN
FOR CALENDAR YEAR 1947
or fiscal year begun ., 19., and ended ., 19.
Return to be made by a Taxpayer having a Gross Income
of more than $10,000, whether or not it has a net income.
To be filed with the Assessor, D. C., not later than the
15th day of the fourth month following the close of your
taxable year.
21A
Name. James G. Stone .J.
(Type or Print)
Trade Name. 1924 Park Road, N. W .j_
i
D. C. Address.J,.
(Street and Number)
(Zon^)
Mailing Address. 1924 Park Road, N. W .L.
(Street and Number (City-Zone) (Stat4)
Kind of Business:
Schedule K.—DEPRECIATION (See Instruction 19)
>* o
S3"
c.« x ^
to
bO'M'g
v. .s ° =>
o IS__ >->
-O — ■- 2
C 3 ^ C
afis
Part of Building
Fum. & Fixtures
Typewriter
1931
1939
1/1/45
u
Q) O
jS Hu.
*> 3 ©.
ft ®.5 °
O *.
^ a o o
g« c t3'
O o g
$1650.00
400.00
45.00
e -
.2 m
-u O u
os «
•k © a>
§11*“
&! * o
ITS
$935.00
340.00
18.00
S o 'SC^C •gS.g
g S I|.2 £ g> - a
* g * H£ g O.WS i
I C3 jyj £2 O j- g
> cn ^ • ti ©
oo « ft
$715.00
60.00
27.00
1 a
o
u 55 © ft
ft grJ cj
cs o
© o as.
<y
^ s —
v, Q.O.S
O ®~.C
Q<H
$55.00
20.00
9.00
Total. (Enter at Item 23, page 1)
f Explain Basis unless cost is used.
$84.00
Schedule L.—Other Deductions
Telephone $60.00; Bank Charges $60.00; Sta. & Printing $200.00; Accounting 25.00;
Auto Exp., Gas & Oil, Operation used in Business $746.00; Heat $22.00;! Safe Dep.
Box $6.00.
* Total. (Enter as Item 25, page 1) .j._$1119.00
AFFIDAVIT OF TAXPAYER
(To be executed by principal owner)
1 swear (or affirm) that this return (including any ac¬
companying schedules and statements) has been examined
by me, and to the best of my knowledge and belief is a trjue,
correct, and complete return, made in good faith for the
accounting period stated, pursuant to the District of Co-
lumbia Income and Franchise Tax Act of 1947 and the
Regulations issued under authority thereof.
Subscribed and sworn to before me this.day of
. Apr 14 1948 ., 194.
Notarial Seal
(Signature of officer administering oath). Peyton B.
Fletcher, Jr.
(Signature). James G. Stone .
My commission expires. Notary Public, D. C., My Com¬
mission Expires Jan. 31,1950.
(Title) . Owner .
* # # #
Resp. Ex. B
# # # #
FORM D-30
DISTRICT OF COLUMBIA
UNINCORPORATED BUSINESS FRANCHISE
TAX RETURN
FOR CALENDAR YEAR 194S
or fiscal year begun ., 19., and ended .., 19.
Return to be made by a Taxpayer having a Cross Income
of more than $10,000, whether or not such taxpayer has a
net income.
To be filed with the Assessor, D. C., not later than the
1.5th day of the fourth month following the close of vour
taxable year.
Trade Name. Own .
(Type or Print)
Name of Member(s) . James S. Stone .
23 A
D. C. Address. 1924 Park Rd., A 7 . W .J....
(Street and Number) (Zone)
Mailing Address. 1924 Park Road, N. W .[...
(Street and Number (City-Zone) (State)’
Kind of Business. Real Estate Loans .L.
Number of places of business:. One.
Schedule F. — Proprietors’, Partners’ or Members’ Share of
Income and Salaries (See Instruction 17)
!
1. Name of each partner or member. Jas. S. Stone .j...
2. Residence Address ....1924 Park Road, Washington, D. <7.
4. Percentage of time devoted to this business. 100 .
5. Salary Claimed for Services Rendered... .§7000.00 .j..
Schedule K.—DEPRECIATION (See Instruction 26)
>% o
X
£ o
C.
2
Pi b0*« tJ
<h.S°3
°2’3-
.n E
u
o o a
,C -o u Pf
•*-> s <U ^
O <75^ O'”"
+- 2 *? -g >»
j- *.g ° St
« o O o S'
OT£j C — td g
U o c c P.
Q C« o
. w S
eo
art of Building 1931 $1650.00
urn. & Fixtures 1939 400.00
ypewriter 1/1/45 45.00
Total. (Enter as Item 24, page 1)
Explain Basis unless cost is used.
$999.00
360.00
27.00
bo >x
c O <13
■PXpQT)
‘IS O |
i 0.2 8
cn & ^
$660.00
40.00
18.00
t3?2_P
-2^’= hi '■§ o £
2 to-S cs| .2.0 g
e 2, bo i o tls.
a o.2
Ha c o! a-x
.s|
00 O g
Kfa o
^
a® -2
a ^
^55.00
20.00
9.00
. $84.00
Schedule L.—Other Deductions
elephone $60.00; Accounting $35.00; Bond Charges $60.00; Auto Expense $1243.00;
ta. & Printing $225.00; Bank Box $9.00 Kent $21.88.
* Total. (Enter as Item 27, page 1) . $1660.88
*
24 A
AFFIDAVIT OF TAXPAYER
(To be executed by principal owner)
I swear (or affirm) that this return (including any ac¬
companying schedules and statements) has been examined
by me, and to the best of my knowledge and belief is a true,
correct, and complete return, made in good faith for the
accounting period stated, pursuant to the District of Co¬
lumbia Income and Franchise Tax Act of 1947 as amended,
and the Regulations issued under authority thereof.
Subscribed and sworn to before me this 11th day of April,
194 9.
Notarial Seal
(Signature of officer administering oath) Lewis E . Thomas
(Signature) . James G. Stone .
My commission expires. Notary Public, T). C., My com¬
mission expires Oct. 14,1951.
(Title) . Owner .
BRIEF FOR RESPONDENT
IN THE
United States Court of Appeals
For the District of Columbia Circuit
Sisfr-c' <_ ■ •r"*“
r ' 5 r~ r» - -.
No. 11,273
. :.&>
James G. Stone. Petitioner,
v.
District of Columbia. Respondent.
r ' /«• '
PETITION FOR REVIEW OF DECISION OF THE BOARD OF TAX
APPEALS FOR THE DISTRICT OK COLUMBIA
Vernon E. West,
Corporation Counsel, D. C.,
Chester H. Gray,
Principal Assistant Corporation
Counsel, D. C.,
George C. Updegraff.
Assistant Corporation Counsel, D. C.,
Attorneys for Respondent,
District Building,
Washington 4, D. C.
DIVISION OF PRINTING ANO PUBLICATION* — D C. GO
RESPONDENT’S STATEMENT OF QUESTION
PRESENTED
The question is whether petitioner’s activities during
the tax years involved amounted to carrying on a “trade
or business” within the meaning of the applicable portions
of the District of Columbia Income and Franchise Tax Act
of 1947.
INDEX
SlJBJKCT INDKX
P^CE
Preliminary Statement _ 1 1
Jurisdictional Statement- 1
• |
Counter-Statement of the Case_ | 2
Statutes Involved _ 3
Regulation Involved _ j 5
Summary of Argument _ 6
Argument_ , 7
Conclusion _ ' 17
Cases Citkd
Adoption oj a Minor, In re. 70 App. D. C. 191, 144 F. 2d 644. 156 A. L. R. !
1001_ 17
Capital Traction Co. v. Hoj, 174 U. S. 1, 43 L. Ed. S73, 19 S. Ct. 580 _ jl7
Chain tier v. Helvering, 62 App. D. C. 85. 69 F. 2d 571_ 15
Copper Queen Consolidated Mining Co. v. Arizona, 206 U. S. 474, 51 L.
Ed. 1143. 27 S. Ct. 695 _ ]L7
District oj Columbia v. Pickjord, S6 U. S. App. D. C. 17, 179 F. 2d 1
271 _9,13.14
Doggett v. Burnet, 62 App. D. C. 103, 65 F. 2d 191_ |5
Eastman Kodak Co. v. District, of Columbia. 76 App. D. C. 339. 131 F. 2d
347 _ t7
Flint v. Slone Tracey Co.. 220 U. S. 107, 55 L. Ed. 3S9. 31 S. Ct. 342 _12, J3
Hazen, el al. v.. National Rifle Association oj America, 69 App. D. C. 339,
101 F. 2d 432 _ 14
Henry J. Robb, Inc. v. Distinct of Columbia. 80 U. S. App. D. C: 246. 152
F. 2d 283 _8,9. ljO
McCoach v. Minehill & Schuykill Haven R. R. Co., 228 U. S. 295, 57
L. Ed. 842. 33 S. Ct. 419_12,13,14. lk
Pearson v. Laughlin. _U. S. App. D. C.__ 190 F. 2d 658 _ 11
Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 39 L. Ed. 759, 15 S.
Ct. 673 _ lk
State v. Tuscaloosa Building <fc Loan Association, 230 Ala. 476. 161 So.
530 _ t
i
11
INDEX—Continued
PACK
Three Forks Coni Co. v. United States (DC, VVD Pa., 1923), 9 F. 2d
946 _ 15
Von Bninnbach v. Sargent Land Co., 242 U. S. 303, 61 L. Ed. 460, 37 S. Ct.
201_ 13
Ward man Heal Estate Investment Corp. v. District of Columbia, SO U. S.
App. D. C. 24S, 152 F. 2d 2S5_S,9.10
Woodhull v. District of Columbia. 73 Wash. Law Rep. 233 _10,15
Zonne v. Minneapolis Syndicate, 220 U. S. 187, 55 L. Ed. 42S, 31 S. Ct.
361_12,13.14
Statutes Ixvolvkd
Act of August 5, 1909, 36 Stat. 11. 112 c. 6- 11
Act of October 3. 1913, 3S Stat. 114, 201 c. 16_ 11
Act of May 16. 193S. 52 Stat. 370, c. 223 _ 2
Act of May 3, 194S, 62 Stat. 206, c. 246 _ S
Corporation Tax Law of 1909, 36 Stat. 11_6.11,12.13
District of Columbia Code, 1940 ed.:
Sec. 47-1543(12) _ 8
Sec. 47-1551 (Supp. VII)-3, 8
Sec. 47-1551 (c) (Supp. VII)_ 4
Sec. 47-1557(a) (Supp. VII)- 4
Sec. 47-1567(b) (Supp. VII)_ 11
Sec. 47-1571(a) (Supp. VII)- 8
Sec. 47-1574 (Supp. VII)- 4
Sec. 47-1574(b) (Supp. VII) _ 4
Sec. 47-1593 (Supp. VII)_ 2
Sec. 47-1595 (Supp. VII)- 5
Sec. 47-2403 _ 2
Sec. 47-2404 _ 2
District of Columbia Income Tax Act of 1939, 53 Stat. 1106. c. 367. sec.
43 _S. 10.15
District of Columbia Income & Franchise Tax Act of 1947. 61 Stat. 331,
c. 258 _ 3
Title I:
Sec. 1_ 8
Sec. 4_ 4
Sec. 4(h)_4,8,14.15
Sec. 4 (p)-4,14
Title III:
Sec. 2(a)-4,10
Sec. 2(b)_ 4
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INDEX—Continued \ iii
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! PACE
Title VII _1_| 8
Title VIII: I
Sec. 1_4, 8
Sec. 3_4,5,|8.. 11
Title XV: !
Sec. 1_I 2
Title XVI_| 5
District of Columbia Revenue Act of 1937:
Sec. 3 of Title IX_ j 2
Sec. 4 of Title IX_ 2
United States Statutes at Large:
36 Stat. 11, 112, c. 6_ 11
37 Stat. 1785 _ 11
38 Stat. 114,201, c. 16_ 11
52 Stat. 370, c. 223 _ 2
53 Stat. 1106. c. 367 _ | 8
61 Stat. 331, c. 25S_1_ 3
61 Stat. 359. c. 25S_ j 2
62 Stat. 206. c. 246 _ ] 8
i
Other Authorities |
j
District of Columbia Tax Reports, CCH, par. 13-912_ 1 6
District of Columbia Tax Reports, Prentice-Hall, par. 11.600 _ 6
Regulations: i
Regulations Pertaining to Income Franchise Tax Act of 1947, pro- 1
inulgatcd by the Commissioners of the District of Columbia j
August 28, 1947: j
Sec. 10-1_ 5
Sec. 10-1 (a) _;_ j5
Sec. 10-1 (b)_ |5
Sec. 10-2 (b)_ |6
New York Unincorporated Business Tax Regulations, Article 4_ 1)5
I
Reports: j
1 New York Tax Reports, published by CCH. par. 19-62S_ 16
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IN THE
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United States Court of Appeals j
foe the District of Columbia Circuit
No. 11,273
James G. Stone, Petitioner ,
District of Columbia, Respondent.
PETITION FOR REVIEW OF DECISION OF THE BOARD OF TAX
APPEALS FOR THE DISTRICT OF COLUMBIA
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— ■ — ■ —
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BRIEF FOR RESPONDENT j
PRELIMINARY STATEMENT
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In view of the fact that petitioner’s brief has not beeiri
prepared in compliance with Rule 17 of the Rules of thijs
Court, counsel for respondent will endeavor to supply omis¬
sions therefrom deemed material. [
JURISDICTIONAL STATEMENT
I
This case involves unincorporated business taxes foj:
the calendar years 1947 and 1948. Petitioner filed tax rej-
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2
turns for those years and paid the taxes due (App. 5, 6,
Findings 10, 11). Timely claims for refund were filed
which were denied April 18, 1951 (App. 6, Finding 11).
On July 16, 1951, petitioner appealed to the Board of Tax
Appeals (App. 2). The decision of the Board was entered
October 31,1951 (App. 10). The petition for review by this
Court was filed November 28, 1951 (Tr. 94).
This Court has jurisdiction to review decisions of the
Board of Tax Appeals in this kind of case under the provi¬
sions of Secs. 3 and 4 of Title IX of the District of Colum¬
bia Revenue Act of 1937, as added by the Act of May 16,
1938, 52 Stat. 370, c. 223, as amended (Secs. 47-2403 and
47-2404, D. C. Code 1940), as authorized by Sec. 1, Title XV
of the District of Columbia Income and Franchise Tax Act
of 1947 (61 Stat. 359, c. 258; Sec. 47-1593, 1). C. Code 1940,
Supp. VII).
COUNTER-STATEMENT OF THE CASE
Although petitioner’s Statement of the Case does not
contain any references to the joint appendix or the trans¬
cript of record, it appears to counsel for respondent that
the statement was prepared principally from the Board’s
findings of fact (App. 4-6). Except for some omissions
petitioner’s Statement of the Case appears to be correct.
Respondent deems the following additional facts to be
material:
In addition to stating in his tax return for the year 1948
that he devoted 100% of his time to the business of making
real estate loans, petitioner claimed a salary deduction for
services rendered in the amount of $7,500.00 (App. 23).
Many other business expense deductions were taken by
petitioner in substantial amounts in connection with this
business for the tax years involved. The deductions in-
eluded depreciation on part of petitioner’s home, certain
furniture and fixtures, and a typewriter (App. 11, 21, 23);
o
o
part of the maid’s wages (App. 15); charges for telephone,
stationery and printing, accounting, heating, a safe deposit
box and bank charges (App. 12, 15, 16, 21, 23), as wel} as
expense of operating an automobile (App. 14, 21, 23) wh[ich
petitioner used in connection with his inspections of vari¬
ous properties and for investigating the various note
makers (App. 5, 14).
During 1947 and 1948, and prior thereto, petitioner \vas
called by real estate agents or by title companies who in¬
quired whether he wanted to buy notes secured by secbnd
deeds of trust. If petitioner had funds available be looked
at the property to see the value that was there, and jthe
amount secured by first trust, and would investigate jthe
purchaser of the property, who was the maker of the npte.
If petitioner decided the note was a good risk he would
agree to take it, after agreement on the price had btjen
reached. He bought the notes on a discount basis. (App.
4, Finding 2.)
It was known to the real estate people and the title com¬
panies that petitioner was a prospective buyer of secoiid-
trust notes. In order for a real estate agent to sell a hodse
it was sometimes necessary that it be financed to the satis¬
faction of the purchaser, and petitioner frequently got ca^L
from different companies inquiring as to whether he woiild
buy a particular note. Petitioner did not do business wiith
any particular group of agents. He had two sons working
for a title company and they told various agents that lie
was interested in the purchase of notes. (App. 4, Find¬
ing 3.) j
STATUTES INVOLVED
The statutory provisions involved are contained in tjic
District of Columbia Income and Franchise Tax Act iof
1947 (61 Stat. 331, c. 258; D. C. Code 1940, Supp. VII, Secis.
47-1551, et seq.), the material portions of which are as
follows:
4
Title 1, Sec. 4 (Code, Sec. 47-1351c):
“Sec. 4. GENERAL DEFINITIONS.—For the
purposes of this article and wherever appearing
herein, unless otherwise required by the context—
* • • * •
“(h) The words ‘trade or business’ include the
engaging in or carrying on of any trade, business,
profession, vocation or calling, or commercial ac¬
tivity in the District of Columbia; * * *
* * * * *
“ (p) The words ‘include’, ‘includes’, or ‘includ¬
ing’, when used in a definition contained in this
article, shall not be deemed to exclude other things
otherwise within the meaning of the word or words
defined.”
Title III, Sec. 2(a) (Code, Sec. 47-1557a):
“(a) The words ‘gross income’ include gains,
profits, and income * * * derived from any trade
or business or sales or dealings in property,
whether real or personal, other than capital assets
as defined in this article, growing out of the owner¬
ship, or sale of, or interest in, such property; also
from rent, royalties, interest, dividends, securities,
or transactions of any trade or business carried
on for gain or profit, or gains or profits, and income
derived from any source whatever.”
[Sec. 2(b) of Title III, supra , specifically ex¬
cludes from the words “gross income” many items
of income, none of which applies to the present
case.]
Title VIII, Secs. 1 and3 (Code, Sec.47-1574and47-1574b)
“Sec. 1. Definition of Unincorporated Busi¬
ness. For the purposes of this article (not alone of
this title) and unless otherwise required by the con¬
text, the words‘unincorporated business’mean any
trade or business, conducted or engaged in by any
individual, whether resident or nonresident, statu¬
tory or common-law trust, estate, partnership, or
limited or special partnership, society, association,
executor, administrator, receiver, trustee, liquida¬
tor, conservator, committee, assignee, or by any
other entity or fiduciary, other than a trade or
business conducted or engaged in by any corpora¬
tion ; and include any trade or business which if
conducted or engaged in by a corporation would be
taxable under title VII of this article. * * *”
“Sec. 3. Imposition and Rate of Tax.—For the
privilege of carrying on or engaging in any trade
or business within the District and of receiving
income from sources within the District, there is
hereby levied for each taxable year a tax at the
rate of 5 per centum upon the taxable income of
every unincorporated business, whether domestic
or foreign (except those expressly exempt under
title II of this article).”
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REGULATIONS INVOLVED
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The following portions of Regulations, })romulgatcd by
the Commissioners of the District of Columbia pursuant tjy
authority of Title XVI of the statute involved (Sec. 47-159q,
I). 0. Code 1940, Supp. VII), are deemed material:
“Sec. 10-1 * # * While it is not the purpose of |
these regulations to give specific definitions which
may cover most conceivable kinds of employment
or activity that come within the statutorv defi-
nition of ‘trade or business’, two general defini¬
tions are important and are given below:
“(a) A ‘business’ is that which occupies the
time, attention, and labor of men for the purpose
of a livelihood or profit. Engaging in business in¬
volves the investment of time or capital, or both,
on the future outcome of the enterprise, whether it
be successful or unsuccessful. * * *
“(b) ‘Commerce’ consists of intercourse and
traffic and includes the transportation of persons
and property as well as the purchase, sale and ex¬
change of commodities.”
“Sec. 10-2(b). A corporation or unincorporated
business may derive income from * * * investments
made or other capital employed in the District, and
in other ways, and thus be liable for the tax upon
such income * * (Published in Par. 13-912,
District of Columbia Tax Reports, CCH, and in
Par. 11,600, D. C. Tax Reports, Prentice-Hall.)
SUMMARY OF ARGUMENT
Petitioner is engaged in business as a money lender. His
activity in this business was regular and sustained, and had been
for many years prior to the tax years involved. This was peti¬
tioner’s means of livelihood. Petitioner’s business is no different
from that of every mortgage loan company. The statute involved
imposes a tax upon the taxable income of every unincorporated
business for the privilege of carrying on or engaging in any trade
or business within the District and of receiving income from
District sources, and defines an unincorporated business to be any
trade or business conducted or engaged in by an individual in¬
cluding one which if conducted or engaged in by a corporation
would be taxable under similar provisions of the statute. The
statutory definition of “trade or business” is the same as used
in a prior statute. This Court held under the prior statute that
lending of money on real estate security and collecting interest
thereon (as does petitioner herein) was a trade or business and,
therefore, it must be a trade or business under the identical defini¬
tion in the statute here involved.
Cases relied upon by petitioner, decided under the Corporation
Tax Law of 1909, the Federal capital stock tax law, and the pres¬
ent District law are not in point and are not applicable. The
Supreme Court defined “business” under the Corporation Tax
Law cases to mean “that which occupies the time, attention, and
labor of men for the purpose of a livelihood or profit”. Cases
relied on by petitioner which were decided under the Corporation
Tax Law involved corporations which were no longer active and
I
which had discontinued efforts in the pursuit of profit and gajh.
The facts in the present case show that petitioner is in the exact
opposite position.
The decision of the Board of Tax Appeals was correct ahd
should be affirmed.
ARGUMENT |
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Petitioner’s activities amounted to carrying on a “trade orj
business” within the meaning of the statute involved.
Although petitioner tiled a Statement of Points contain¬
ing four numbered paragraphs (Tr. 95), petitioner’s briqf
is obviously confined to argument of the question whether
he was engaged in a trade or business within the meaning
of the statute involved.
As will be seen from petitioner’s Statement of the Casq,
supplemented by respondent’s Counter-Statement of tlje
Case, the petitioner was engaged in a lucrative business qf
a money lender. 1 Some of the funds he loaned were hiis
own and some were Itorrowed. His activity in this respect
was regular and sustained, and had been for a number qf
years prior to the tax years involved. This was petitioner Is
means of earning a livelihood; he daily busied himself witji
the activities required by such business and took substan¬
tial business deductions in computing his District iucomjs
tax as well as in computing his unincorporated business tax
liabilitv for the tax vears here involved. Petitioner’ll
• •
business is no different in operation from that of every
mortgage loan company.
1 The Supreme Court of Alabama was of opinion that since a shareholder iijt
a building and loan association who borrowed money from the association
was a “borrower” it followed that “the association must be regarded as 4
lender”, with respect to loans on real estate mortgages. Stale v. Tuscnlooz.fi
Building & Loan Association, 230 Ala. 476. 161 So. 530. If, then, a building
:ind loan association is a “lender” of money when it makes a loan to one of
the shareholders, it follows, a fortioran, that petitioner was a “lender” of
money. And when that activity is the lender’s principal business and result^
in his major income he is indeed a “lender of money”, ibid.
1
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Sec. 3, Title VIII, of the statute involved imposes a tax
at the rate of 5 per centum upon the taxable income of
every unincorporated business for the privilege of carrying
on or engaging in any trade or business within the District,
and of receiving income from sources within the District,
with certain exceptions not here applicable.
Sec. 1, Title VIII, of the statute involved defines an un¬
incorporated business to be any trade or business con¬
ducted or engaged in by an individual, whether resident or
nonresident, and specifically includes any trade or business
which if conducted or engaged in by a corporation would be
taxable under Title VII of the statute which imposes the
same tax on corporations.”
The applicable provisions of Sec. 4(h), Title I, of the
statute involved provide that the words “trade or busi¬
ness” include “the engaging in or carrying on of any trade,
business, profession, vocation or calling or commercial ac¬
tivity” in the District of Columbia.’*
This definition of
“trade or business”
is verbatim the same as the definition
of the term in Sec. 43 of the District of Columbia Income
Tax Act of 1939, 53 Stat. 1106, c. 367 (Sec. 47-1543(12),
D. C. Code 1940). The District of Columbia Income Tax
Act was repealed, except for certain purposes not here in¬
volved, by Sec. 1, Title I, of the statute here involved. 4
The statute here involved was approved July 16, 1947,
nearly two years after decisions in the cases of two cor¬
porations under the 1939 Act, supra, which were engaged
in the business of purchasing and selling real estate mort¬
gage notes and collecting interest on such notes. Henrit
./. Robb, Inc. v. District of Columbia, 80 U. S. App. D. C.
246, 152 F. 2d 283, and Wardman Real Estate Investment
Corp. v. District of Columbia, 80 U. S. App. I). C. 248, 152
F. 2d 285. The properties were later sold at a profit and
-Sec. 47-1571a. D. C. Code 1940, Supp. VII.
3 Other provisions of the definition, as amended by the Act of May 3.
194S, 62 Stat. 206. c. 246, are not here applicable.
4 Sec. 47-1551. D. C. Code 1940. Supp. VII.
9
the corporations contended that the gains were 11011 -taxable
capital assets. The statutory definition of a “capital a^-
set” excluded “property held by the taxpayer primarily
for sale to customers in the ordinary course of his trade c|r
business.” It was held, in each case, that the property
was held primarily for sale to customers in the “ordinary
course of his trade or business” and that the gains werle
therefore to be included in the computation of net income.
Therefore, since “lending of money on real estate security 1 ’
(Henry J. Robb, Inc. v. District of Columbia, supra) and
the collection of interest thereon was a “trade or busij-
ness” under the definition of that term in the 1939 Act),
supra, it must be a trade or business under the identical
definition in the statute here involved. Accordingly, sinc<?
a corporation would be engaged in a trade or business if it
conducted a business like petitioner in the present casej
consequently the petitioner is engaged in a trade or busi-j
ness and is liable for the taxes involved. It is clear, there-)
fore, that the activities involved in the Robb case would be)
held to be a “trade or business” under the statute here in¬
volved. In this connection it is important to bear in mind)
this Court has already held that Congress, having madei
an unincorporated business a taxable entity, “treated itl
in the same fashion as it treated corporations.” District
of Columbia v. Pick ford, infra. \
The Board of Tax Appeals decided the present case on
authority of the Robb case, supra. The Board stated (App.}
S): “It was necessarily implicit in the [Robb] decision
that its trust-note activities were a trade or business.”
The T Yardman Real Estate Investment Corp. case, supra, \
was decided the same day (November 13, 1945) and on
authority of the Robb case. This Court pointed out in the
Wardman case that petitioner’s income accrued from the
purchase and sale of real estate mortgage notes and from
interest collected thereon. Petitioner’s theory in the pres- j
out case that because he buys notes, holds them to maturity
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and collects the interest but does not sell any of such notes
(Pet. Br., p. 9) is untenable. It seems pertinent to note
here that the statutory definition of the words “gross in¬
come” in the statute involved (Sec. 2(a), Title III, supra )
includes gams, profits and income derived from any trade
or business or sales or dealings in property, as well as from
interest and other sources.
The case of Woodhull v. District of Columbia, 73 Wash.
Law Rep. 233, decided by the Board of Tax Appeals on
February 27, 1945, about nine months before this Court
decided the Robb and Ward man cases, is in point and of
interest. That case involved a disallowance by the As¬
sessor of deductions claimed for commissions paid by the
taxpayer to a trust company for its services in managing
her investments. The Board of Tax Appeals reversed the
Assessor and allowed the deductions on the ground that
they were ordinary and necessary expenses paid in carry¬
ing on a trade or business within the meaning of the words
“trade or business” as defined in the District of Columbia
Income Tax Act, supra. In the present case the petitioner
conducted his business personally rather than through an
agent.
Notwithstanding the Woodhull decision, supra, which
authorized “business deductions” of the kind here involved,
and notwithstanding the fact that the Board of Tax Ap¬
peals received evidence on behalf of petitioner with respect
to activities prior to the tax years involved, over respond¬
ent’s objection (App. 10, 11), the Board refused to admit
in evidence petitioner’s individual income tax returns for
certain years prior to those here involved (App. 16, 17)
showing that petitioner took substantial “business deduc¬
tions” in preparing his income tax returns (App. 18-20).
Since the respondent won the case below, no point can be
made by respondent as to this error of the Board. How¬
ever, it is of interest that petitioner desires to be engaged
in a trade or business insofar as the individual income tax
*
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is concerned, with respect to which the tax rate is onll^r
from one per centum to three per centum, 5 but does nbt
desire to be engaged in a trade or business insofar as th^
unincorporated business tax, which has a tax rate of five
per centum, 0 is concerned. This Court recently stated tha|t
it is no more right to allow a party to blow hot and cold aj<
suits his interests in tax matters than in other relationships!.
Pearson v. Laughlin, .U. S. App. I). C. , 190 F. 2d 658.
Petitioner relies upon some cases involving taxation with
respect to rentals from real property under the Corporal
tion Tax Law of 1909, 36 Stat. 11, 112, c. 6, which became
law on August 5, 1909. In order to properly understand
those cases it seems necessary to begin with consideration!
of Pollock v. Farmers’ Loan '& Trust Co ., 157 U. S. 429, 39
L. Ed. 759, 15 8. Ct. 673. In that case it was held that a!
Federal tax on income from the rental of real estate was!
a direct tax within the meaning of the Constitution of the
United States and that so far as the statute there involved!
i
levied a tax on the rents or income from real estate it wasj
in violation of the Constitution of the United States, be-;
cause not apportioned among the States, and therefore in-!
valid. ... ;
The Corporation Tax Law of 1909, supra, imposed a
special excise tax upon corporations and certain associa- j
tions “organized for profit” and “engaged in business”, j
That law was repealed by the Act of October 3, 1913, 38 j
Stat. 114, 201, c. 16, after the Secretary of State had certi- |
tied on February 25, 1913 (37 Stat. 1785) that the Sixteenth |
Amendment, empowering Congress to lay and collect taxes
on income, without apportionment, etc., had become a part, j
of the Constitution. Therefore, insofar as any case decided I
under the Corporation Tax Law holds that rent or income
from real property cannot be taxed, as did the Pollock case, I
•'Sec. 47-1567b. D. C. Code. 1940, Supp. VII.
,: Sec. 3. Title VIII. of the statute involved, supra.
12
supra, such decision has no force or effect since the Six¬
teenth Amendment.
McCoach v. Minehill <£ Schuykill Haven R. R. Co., 22S
IT. S. 295, 57 L. Ed. 842, 33 S. Ct. 419, the principal case
relied upon by petitioner, as well as Flint v. Stone Tracey
Co., 220 U. S. 107, 55 L. Ed. 389, 31 S. Ct. 342, and Zonne
v. Minneapolis Syndicate, 220 U. S. 187, 55 L. Ed. 428, 31
S. Ct. 361, involved Federal taxes assessed under the Cor¬
poration Tax Law of 1909, supra.
In the McCoach case it was held that a corporation
which had leased all its property to another, and was doing
onlv what was necessarv to receive and distribute the in-
come therefrom among stockholders, was not doing busi¬
ness within the meaning of the Corporation Tax Law. In
that case the corporation had a franchise for the construc¬
tion and operation of a railroad. The road was built and
operated for many years. In 1861, pursuant to authority
granted by the [Pennsylvania] State legislature, the cor¬
poration leased its entire railroad and everything appur¬
tenant thereto for a term of 999 years at an annual rental.
The Flint case dealt with a number of realty and mining
companies and it was held, inter alia, that companies own¬
ing and leasing lands, hotels, and taxicabs, were engaged
in business within the meaning of the statute.
In the Zonne case the Court pointed out that the corpora¬
tion “as originally organized and owning and renting an
office building, was doing business within the meaning of
the statute”; hut the Court went on to sav that in 1906
the property was leased for 130 years at an annual rental,
that the articles of incorporation were amended so that
the sole authority of the corporation was to hold title to
the property subject to the lease, receive the rentals and
distribute them to the stockholders. The Court concluded,
under those circumstances, that the corporation had prac¬
tically gone out of business with respect to the property,
had disqualified itself by the terms of reorganization from
13
any activity in respect to it, and consequently held that tb[e
corporation was not “engaged in business ” within the mean¬
ing of the statute. I
The Flint and Zonne cases were decided the same dav-f-
March 13, 1911. The McCoach case was decided April if,
1913, on authority of the Zonne case. It seems pertinent tp
point out that the lease in the McCoach case was for 991/
years, and that the lease in the Zonne case was for ISO
years. I
In the Flint case the Court defined “business” to meaili
“that which occupies the time, attention, and labor of men
for the purpose of a livelihood or profit.” In view of this
definition, it seems important that these Corporation Tax*
Law cases not be considered separately to ascertain the
general rule with respect to what constitutes “engaging in
business”. It is believed that Von Baumbach v. Sargent
Land Co., 242 U. S. 503, 61 L. Ed. 460, 37 S. Ct. 201, in
which the Supreme Court reviewed its prior decisions underj
the Corporation Tax Law of 1909, should be considered.!
In that case the Court stated (242 IT. S. 516):
i
“It is evident, from what this court has said in
dealing with the former cases, that the decision
in each instance must depend upon the particular
facts before the court. The fair test to be derived
from a consideration of all of them is between a
corporation which has reduced its activities to the
owning and holding of property and the distribu¬
tion of its avails and doing only the acts neces¬
sary to continue that status, and one which is still
active and is maintaining its organization for the
purpose of continued efforts in the pursuit of profit
and gain and such activities as are essential to
those purposes .” (Italics supplied.)
Petitioner also relies on District of Columbia v. Pickford,
14
unincorporated business in the District. One of the ques¬
tions involved was whether ownership of a hotel and the
receipt of rent upon its lease was an unincorporated busi¬
ness. This Court held that the question was answered by
the Zonne case, supra, and cases similar thereto, including:
the McCoach case, supra, notwithstanding the fact that in
the Corporation Tax Law cases the Supreme Court had
held, consistently, that a company which was still active,
pursuing gain and profit (including owning and leasing
property), was “engaged in business”. It was, of course,
this respondent’s view in the Pickford case that Pickford
was engaged in business even under the decisions with re¬
spect to the Corporation Tax Law of 1909. In any event,
petitioner in the present case is not engaged in leasing
property owned by him but is engaged in the real estate
loan business, so that the Pickford case is clearly not in
point. This was the view of the Board of Tax Appeals
(App. 9).
The general term “engaged in business” w'as discussed at
length by this Court in Hazen, et al. v. National Rifle As¬
sociation of America, 69 App. D. C. 339, 101 F. 2d 432. It
was stated:
“What then is the meaning of the term ‘engaged
in business’ as employed in the statute? Web¬
ster’s Dictionary defines ‘business’ as ‘Any par¬
ticular occupation or employment habitually en¬
gaged in, especially for livelihood or gain.’ In its
broadest meaning therefore one could be said to
be engaged in business if it were his habit to rum¬
mage through garbage cans in search of food,
after the manner of the human derelicts who may
be seen thus employed on the back streets of our
large cities. * * * ”
The language of sub-sections (h) and (p) of Sec. 4, Title
I, of the statute here involved, supra, indicates that Con¬
gress had in mind a broad meaning for the term “trade or
business”. The Board of Tax Appeals was of opinion,
expressed in the Woodhull case, supra, that Congress “had
in mind a broader, rather than the restricted, meaning tor
the term ‘trade or business’ ” when it enacted the language
of Section 43 of the 1939 Act which, as we have seen, in¬
sofar as is here pertinent, is identical to the definition con¬
tained in this Act. The Board expressed the same vijew
with respect to the present statute (App. 9). If one wjho
habitually rummages through garbage cans in search 'of
food is engaged in business within the ordinary meaning
of the term, certainly the petitioner herein, who habitually
lends and re-lends his own and borrowed funds, and col¬
lects interest therefrom, is engaged in “business” within the
definition of that word under Sec. 4(h), Title I, of the
statute involved. See also Dog gett v. Burnet, 62 Ajip.
D. C. 103, 65 F. 2d 191; and Ckaloner v. II elvering, 62 Apjp.
J). C. 85, 69 F. 2d 571.
Three Forks Coal Co. v. United States (DC, AVD P<h,
1925), 9 F. 2d 946, the remaining case relied on by peti¬
tioner, involved the question whether the Company whs
engaged in business within the meaning of the applicable
revenue act which imposed a capital stock tax with respek
to carrying on or doing business. The Court determined
that the Company was a “holding company” and there¬
fore not liable for the tax, citing the McCoacli case, supra .
and certain others. The Court stated: “The thought
underlying the cases cited, and a number of others nojt
mentioned, is that two corporations are not to be taxe<jl
under the act of Congress, when but one business is carried
on.” The case, therefore, is clearly not applicable.
On pages 7 and 8 of petitioner’s brief the first paragraph
of Art. 4 of the New York Unincorporated Business Tax
Regulations is quoted. Petitioner then states (Br., p. 8) :
“Included in the regulations are a set of official
questions and answers to the regulations. The
following are the questions pertaining to interest
and dividends derived from investments:”
16
However, the second paragraph of Art. 4 of said Regula¬
tions which immediately precedes the question provides as
follows (1 New York Tax Reports, published by Commerce
Clearing House, par. 19-628):
“The following questions and answers will tend
to develop the thought:”
The thought,then, that was intended to be developed by the
questions and answers is the one contained in said Art. 4,
viz., in effect, that the continuity, frequency and regularity
of activities, as distinguished from transactions of an
isolated or incidental nature, must be the factors which
determine whether or not the activities constitute the carry¬
ing on of an unincorporated business under the New York
Law. Aside from that very important factor, there are
other reasons why the hypothetical questions and answers,
as quoted in petitioner’s brief (pp. 8, 9), are immaterial
to any issue here involved:
(a) The administrative officials of New York have never
been fixed in their own minds as to the proper answer to
Question 18, which is the last question quoted in petitioner’s
brief (p. 9). Originally, the answer to Question 18 was
the answer quoted in petitioner’s brief; but the current
answer is:
“No. Pursuant to amendment to Section 3S6 of
the Tax Law by Chapter 554, Laws of 1944, appli¬
cable to returns for taxable years beginning on or
after January 1, 1943, he cannot be deemed to be
engaged in an unincorporated business solely by
reason of the purchase and sale of securities for
his own account.”
(b) A comparison of the Unincorporated Business Tax
Law of New York with the Unincorporated Business Tax
provisions of the District of Columbia Income and Fran¬
chise Tax Act of 1947, supra, will show that they materially
differ in many respects. Therefore, the rule that a statute
17
adopted from another state which has received a “knoivn
and settled construction” will be presumed to have bejen
adopted with the construction placed upon it before adap¬
tion by such other state 7 is not applicable. Copper Qu^en
Consolidated Mining Co. v. Arizona, 206 U. S. 474, 51 L. hSd.
1143, 27 S. Ct. 695; In re Adoption of a Minor, 79 App.
D. C. 191, 144 F. 2d 644, 156 A. L. R. 1001. Had Congress
intended provisions of the District’s Unincorporated Busi¬
ness Tax Law which are identical with any parts of the
New York Unincorporated Business Tax Law to be inter¬
preted as administrative officials of New York interpreted
New York law, it would have so provided in the statute
it did with respect to Federal income tax law in the Dijs-
trict of Columbia Income Tax Act of 1939. See Eastman
Kodak Co. v. District of Columbia . 76 App. D. C. 339, 131
F. 2d 347.
I
CONCLUSION |
The decision of the Board of Tax Appeals was correct
and should be affirmed.
I
i
Respectfully submitted,
j
Vernon E. West,
Corporation Counsel, D. C.,
Chester H. Gray,
. I
Principal Assistant Corporation
Counsel, D. C.,
George C. Updegraff,
Assistant Corporation Counsel, D. C.■ j
Attorneys for Respondent,
District Building,
Washington 4, D. C. \
~ Capital Traction Co. v. It of, 174 U. S. 1, 43 L. Ed. 873, 19 S. Ct. 580.
